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Reading 47: Emerging Markets Finance-LOS b

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 17: Portfolio Management in a Global Context
Reading 47: Emerging Markets Finance
LOS b: Distinguish between market liberalization and market integration and discuss the financial and economic changes indicative of an effective liberalization.

接着上一帖的题

Regarding their statements concerning the value-at-risk measure and structural breaks?

Daniel
     

Shrum
     

A)

Correct

Incorrect

B)

Correct

Correct

C)

Incorrect

Incorrect

D)

Incorrect

Correct



Answer and Explanation

Daniel is incorrect. Although VAR measures left-tail risk, the analytical method (also known as the variance-covariance or delta normal method) for estimating VAR requires the assumption of a normal distribution. This is because the analytical method utilizes the standard deviation of returns. For example, in calculating a daily VAR we calculate the standard deviation of daily returns in the past and assume it will be applicable to the future. Then using the assets expected one-day return and standard deviation, we estimate the one-day VAR at the desired level of significance. The assumption of normality is problematic because it is well documented that returns are not normally distributed in emerging markets.

Shrum is correct. Emerging market data often contain structural breaks (e.g., when liberalizations occur, the pattern of stock returns dramatically changes). If a country is expected to undergo a structural change in the future, then historical data are not very useful for prediction.

Daniel is incorrect. Although VAR measures left-tail risk, the analytical method (also known as the variance-covariance or delta normal method) for estimating VAR requires the assumption of a normal distribution. This is because the analytical method utilizes the standard deviation of returns. For example, in calculating a daily VAR we calculate the standard deviation of daily returns in the past and assume it will be applicable to the future. Then using the assets expected one-day return and standard deviation, we estimate the one-day VAR at the desired level of significance. The assumption of normality is problematic because it is well documented that returns are not normally distributed in emerging markets.

Shrum is correct. Emerging market data often contain structural breaks (e.g., when liberalizations occur, the pattern of stock returns dramatically changes). If a country is expected to undergo a structural change in the future, then historical data are not very useful for prediction.

Daniel is incorrect. Although VAR measures left-tail risk, the analytical method (also known as the variance-covariance or delta normal method) for estimating VAR requires the assumption of a normal distribution. This is because the analytical method utilizes the standard deviation of returns. For example, in calculating a daily VAR we calculate the standard deviation of daily returns in the past and assume it will be applicable to the future. Then using the assets expected one-day return and standard deviation, we estimate the one-day VAR at the desired level of significance. The assumption of normality is problematic because it is well documented that returns are not normally distributed in emerging markets.

Shrum is correct. Emerging market data often contain structural breaks (e.g., when liberalizations occur, the pattern of stock returns dramatically changes). If a country is expected to undergo a structural change in the future, then historical data are not very useful for prediction.


Regarding their statements concerning contagion and post-liberalization stock return variability in emerging countries?

Daniel
     

Shrum
     

A)

Correct

Incorrect

B)

Incorrect

Incorrect

C)

Incorrect

Correct

D)

Correct

Correct



Answer and Explanation

Daniel is incorrect. In emerging markets, there is evidence that extreme negative movements in one market coincide with the same in others, which most investors think of as contagion. However, the mere presence of increased correlations between markets during crisis periods does not suffice as evidence of contagion because correlations increase as volatility increases due simply to the statistical properties of the correlation measure.

Shrum is incorrect. Although liberalization may positively impact return variability if greater information flow results in increases in speculative capital flows, the empirical evidence demonstrates that liberalization does not affect the volatility of returns. Over the long run after liberalization, return variability should decline as the economy matures.

Daniel is incorrect. In emerging markets, there is evidence that extreme negative movements in one market coincide with the same in others, which most investors think of as contagion. However, the mere presence of increased correlations between markets during crisis periods does not suffice as evidence of contagion because correlations increase as volatility increases due simply to the statistical properties of the correlation measure.

Shrum is incorrect. Although liberalization may positively impact return variability if greater information flow results in increases in speculative capital flows, the empirical evidence demonstrates that liberalization does not affect the volatility of returns. Over the long run after liberalization, return variability should decline as the economy matures.

Daniel is incorrect. In emerging markets, there is evidence that extreme negative movements in one market coincide with the same in others, which most investors think of as contagion. However, the mere presence of increased correlations between markets during crisis periods does not suffice as evidence of contagion because correlations increase as volatility increases due simply to the statistical properties of the correlation measure.

Shrum is incorrect. Although liberalization may positively impact return variability if greater information flow results in increases in speculative capital flows, the empirical evidence demonstrates that liberalization does not affect the volatility of returns. Over the long run after liberalization, return variability should decline as the economy matures.


Which of the following countries from Daniel and Shrums table is most likely the newly liberalized emerging market, based solely on the change in the data for each country before and after the supposed liberalization?

A)Country A.
B)
Country B.
C)Country C.
D)Country D.


Answer and Explanation

When an emerging country becomes liberalized, its cost of capital falls, trade and exports increase, and inflation decreases. Additionally, government debt should decrease and economic growth should expand, so government debt to GDP should decline. Country B is the only country of the four that demonstrates these changes after liberalization.
  


Regarding their statements concerning corporate governance in emerging countries?

Daniel
     

Shrum
     

A)

Correct

Incorrect

B)

Incorrect

Correct

C)

Incorrect

Incorrect

D)

Correct

Correct



Answer and Explanation

Daniel is correct. Emerging market firms with weaker corporate governance are more likely to suffer during crises.

Shrum is correct. Corporate governance can be improved in emerging countries when analyst coverage increases. This improves firm valuation, especially when the firm is controlled by family and management and when the firm is from a country with poor shareholder rights. In these instances there is greater opportunity for improvement in corporate governance.

Daniel is correct. Emerging market firms with weaker corporate governance are more likely to suffer during crises.

Shrum is correct. Corporate governance can be improved in emerging countries when analyst coverage increases. This improves firm valuation, especially when the firm is controlled by family and management and when the firm is from a country with poor shareholder rights. In these instances there is greater opportunity for improvement in corporate governance.

Daniel is correct. Emerging market firms with weaker corporate governance are more likely to suffer during crises.

Shrum is correct. Corporate governance can be improved in emerging countries when analyst coverage increases. This improves firm valuation, especially when the firm is controlled by family and management and when the firm is from a country with poor shareholder rights. In these instances there is greater opportunity for improvement in corporate governance.


How should Lakefront Financial hedge the currency risk of the Walenzian stock position?

A)Buy 320 WP call contracts.
B)Buy 1,067 WP call contracts.
C)Buy 320 WP put contracts.
D)
Buy 1,067 WP put contracts.


Answer and Explanation

To hedge the currency risk of the WP stock position, they should buy puts in the amount of WP 10,000,000 × 1/0.3 = WP 33,333,333.33. The put gives them the right to sell WP. With WP 31,250 in one contract, they should buy WP 33,333,333.33/31,250 = 1,067 WP puts.
  

[此贴子已经被作者于2008-9-18 12:17:38编辑过]

TOP

Which of the following best characterizes the relationship between market liberalization and market integration?

A)Market liberalization precedes market integration.
B)
The existence of one does not guarantee the existence of the other.
C)Market integration precedes market liberalization.
D)Market liberalization and market integration occur simultaneously.


Answer and Explanation

Market liberalization does not guarantee the existence of market integration and vice versa. A market can be somewhat integrated (e.g., its stocks are available via closed end mutual funds) without the government pursuing liberalization. A government can pursue liberalization but its stocks might not be freely traded due to impediments in trading.

TOP

Which of the following best characterizes the relationship between market liberalization and stock return volatility? After liberalization, there is evidence that return volatility:

A)increases but in the long run stock volatility should decline.
B)increases and in the long run stock volatility should increase.
C)does not change but in the long run stock volatility should increase.
D)
does not change but in the long run stock volatility should decline.


 Answer and Explanation

Liberalization may positively impact return variability if greater information flow results in greater return reactivity or if speculative capital flows increase. On the other hand, there should not be as much deviation from fundamental value, so return variability may decline. The empirical evidence, however, demonstrates that liberalization does not affect the volatility of returns. Over the long run, return variability should decline as the economy matures.

TOP

Which of the following best characterizes the behavior and implications of changes in the dividend yield after liberalization? Dividend yields:

A)increase and this suggests that the cost of capital permanently declines.
B)increase and this suggests that the cost of capital temporarily increases.
C)decrease and this suggests that the cost of capital temporarily increases.
D)
decrease and this suggests that the cost of capital permanently declines.


Answer and Explanation

Liberalization results in initially increased capital flows into a developing country. The presence of reduced dividend yields in developing countries after liberalization suggests that the reduction in the cost of capital is permanent.

TOP

thanks.

TOP

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